Schaeffer's Tool Box: Forest Oil's Decline Has Fuel to Run Lower

              

As I noted in last week's look at Schlumberger Limited (SLB), the energy sector has been pounded lately due to the continued decline in commodities prices. Yesterday, the February crude oil futures contract ended its last session of trading at $38.74 per barrel, but not before tagging its lowest level since the contract began trading. Meanwhile, the March contract is now poised to follow suit, hovering just above the $40-per-barrel mark in today's trading.

As regular readers might have guessed, I have returned my focus to the energy sector in this week's column due to the appearance of several related companies in today's filter for "Analyst most liked stocks." In fact, no less than 7 of the top 10 results - when sorted by their 60-day relative strength performance versus the S&P 500 Index (SPX) and their number of "buy" ratings - are involved in exploration, acquisition, development, production, and marketing of coal, oil, or natural gas.

But, I digress. Let dive right into today's results by taking a closer look at the filter criteria responsible for this selection of potential bearish trading ideas:

• Analyst most liked stocks
• A minimum stock price of $10 per share
• Minimum put & call open interest of 10,000 contracts
• Minimum average daily stock volume of 100,000
• Trading below their 20-day moving average
• Trading near an annual low
• Total analyst rankings greater than 10

If you haven't familiarized yourself with the Schaeffer's Stock Screener page, you might want to preface today's article by reading this primer on how to use this set of stock filtering tools.

The Sentiment Rundown

One of the keys to Expectational Analysis ^® is a wealth of either bullish or bearish investor sentiment that runs counter to the stock's technical performance. As you can see from the chart above, today's filter results have attracted a considerable degree of optimism. Alpha Natural Resources (ANR) rises to the top of the list due to its massive underperformance relative to the SPX, but also because of 8 "buy" ratings leveled against it. Furthermore, speculative traders are also heavily optimistic on this laggard, as calls nearly double puts among near-term options.

Meanwhile, Forest Oil (FST) leads the pack in terms of excessive call open interest, as its SOIR rests at an annual low - indicating that options traders have not been more bullish toward the shares in the past year. FST also sports 8 "buys" and only 1 "sell" rating. Finally, Pioneer Natural Resources' (PXD) sentiment indicators fall in pretty much the same range as FST and ANR.

The point here is that investors in these 3 stocks remain stubbornly bullish toward the equities despite their weak technical performance. Optimism amid poor price action is a hallmark of contrarian investing, and could be a sign that ANR, FST, and PXD are poised to extend their losses. Before we pass judgment, let's zero in on the technical backdrop for confirmation of the respective downtrends.

Getting Technical

With our sentiment drivers in place, we turn to technical performance. While all of our stocks are pre-screened to be underperformers, not all downtrends are created equal. As such, it is important to take a look at your filter results a bit more closely from a technical perspective to determine if the selections are in a well-defined decline. Below are the weekly charts of ANR, PXD, and FST.

Alpha Natural Resources (ANR)

Coal mining specialist Alpha Natural Resources (ANR: sentiment, chart, options) has vastly underperformed the broad market from a technical perspective. The shares have fallen some 48% versus the SPX during the past 60 trading sessions, and the stock is off more than 86% from its all-time high set in July 2008. What's more, the equity has been plagued by resistance at its declining 10-week moving average since August 2008. Currently, the shares are being squeezed between this trendline and building support at the 15 level.

According to the stock's sentiment indicators, a breach of this region could be potentially devastating, as it could lead to a sharp unwinding of bullish sentiment in the form of heavy selling pressure. That said, ANR could just as well trend sideways along support at the 15 level, eroding any time value in an option position and tying up capital that could be better used in other investments. If you decide to take a chance on an ANR short position, a breach of the 15 level would be confirmation of the downtrend, while any potential move above resistance at the 10-week moving average would be an exit sign.

Pioneer Natural Resources (PXD)

The technical layout for Texas-based oil & gas firm Pioneer Natural Resources (PXD: sentiment, chart, options) is eerily similar to the aforementioned ANR. The stock has fallen more than 62% during the past 52 weeks, with the decline accelerating to a loss of more than 81% since the PXD peaked at $82.21 in mid-July 2008. Since that time, the shares have fought a losing battle with resistance at its 10-week moving average, breaching former round-number support at the 20 level in the process.

Also like ANR, there is the potential for building short-term support at the 15 level. While PXD breached this region on a weekly closing basis in late December 2008, there is still the potential for this sideways trend to continue during the short term. Once again, traders should be wary of this technical support. Watch for a breach of the 15 level for confirmation of the trend, while a move above the 20 level should be considered reason to exit a short position.

Forest Oil (FST)

Colorado-based oil & natural gas specialist Forest Oil (FST: sentiment, chart, options) has underperformed even ANR and PXD during the past 52 weeks, shedding nearly 70% of its value during this time frame. The stock is also being pressured lower by its 10-week moving average, a trendline that FST has closed only 1 week above since early July 2008. What sets this equity apart from those mentioned above is that FST is currently trading below short-term support at the 15 level (what is it with the 15 level today?). Furthermore, the security's 10-week trendline is quickly descending into this area, potentially providing a double-barreled layer of overhead resistance. Combine this with the extreme degree of bullish sentiment from options players and the potential for analyst downgrades, and FST becomes my Schaeffer's Tool Box pick of the week.

Traders might want to consider a May 15 put to take advantage of an extended decline in the shares, though open interest on FST is pretty thin and could pose liquidity problems. Whether you short the stock or trade the put, think about placing a stop-loss on the position with a trade above FST's 10-week moving average.

Remember, your risk tolerance may be different from my own, and I encourage you to expand on the research I've done here to arrive at your own conclusions. Personally, I usually look for an in-the-money, intermediate-term put position to take advantage of a potentially sharp decline in the shares. With an in-the-money pick 2 to 3 months out, you can help mitigate any potential market fluctuations that could impact your position.

As always, email me with your comments and questions. And, you can now have my articles emailed directly to your inbox. To sign up for this service, simply click here and log in with your Schaeffer's username and password. Once on the alerts page, choose "author" from the first drop down box, decide how often you want to be alerted (intraday, daily, weekly, or monthly), and enter "Joseph Hargett" into the third box. It's that simple, and you'll never miss an important commentary again.